Japan's car makers try to rev-up domestic market

Toyota's concept car 'Fun-Vii' is displayed at the Tokyo Motor Show in Tokyo, Japan on Wednesday. Click on the photo to see a complete SLIDESHOW of the concept cars on display at this year's Tokyo Motor Show.

By Arata Yamamoto, NBC News Producer

TOKYO – Japanese car makers have had a tough year.

First the devastating March earthquake and tsunami struck at their supply chain for key auto parts and then flooding in Thailand forced some companies to suspend factory production for weeks. But the natural disasters only compounded larger economic problems for the car companies: the record high value of the yen has greatly hindered profits from export sales.

Add to those issues the growing reluctance among young Japanese to own vehicles, plus the consistent aging of Japan’s population, and all indications point to a shrinking domestic market. It’s what many here fear will eventually result in Japan's “industrial hollowing.”

The bi-annual Tokyo Motor Show will kick-off this weekend despite the adverse obstacles. With more domestic companies participating, a new event venue, and showcasing futuristic energy-efficient vehicles, the show hopes to re-invigorate Japan's domestic auto market.

A ‘smartphone on wheels’In his opening remarks to the press Toyota President Akio Toyoda vowed he would "never give up” and presented the company's new slogan: "Fun to Drive, Again.”

And to do just that, Toyota unveiled its new "86" sports car, and the futuristic concept car, the Fun-Vii (which stands for Fun Vehicle Interactive Internet).

Critics have dubbed the Fun-Vii a "smartphones on wheels" or something straight out of the sci-fi movie “TRON.” Cloaked in a sleek black casing, both the exterior and the interior of the Fun-Vii car are designed to act as projection panels for the driver to display images or color depending on the "mood" of the driver.

It also comes with a "navigation concierge" where a Princess Leia-like hologram guides the driver through virtual street maps, and utilizing satellite GPS readings, the car will warn the driver of any in-coming vehicles tucked behind the corner of a building.

At the moment Toyota says there are no production plans for the Fun Vii.

Small cars for the urban, silver-haired consumerToyota’s real bid for the domestic market is the Aqua, their latest compact-class hybrid car, which is smaller and more budget-friendly than their popular Prius series.

All of the automakers are showcasing their new fleet of compact-sized vehicles, reflecting Japanese consumer demands for more affordable, even smaller-sized cars with improved fuel efficiency and an emphasis on conservation.

It’s also a trend which reflects the nation's increasingly silver population.

"By 2015, one out of four people will be over 65 years old. And our vision is that those people will be able to continue to lead an active life," said Honda Chief Engineer Ikuo Kurachi explaining to me the thinking behind their new "mini, mini-van" the N Box Plus.

The compact mini-van is equipped with easy-to-open sliding doors and a large interior space with a slope that can hold a 4-wheel electric scooter, the MonPal, which is designed for senior citizens. The idea is that for long distances, one can drive the N Box and then for more local mobility they can take out the MonPal.

Nissan is also looking to the future with their third generation electric vehicle concept model, the Pivo3, a three-seater with a central steering wheel and minimum turning radius of about six feet that allows drivers to park practically anywhere.

"It features technologies that we consider are going to be important for the future, particularly around urban areas. Zero emission. Highly maneuverable, urban car," said Nissan CEO Carlos Ghosn.

It’s a design that takes into account a future in which as Japan’s population moves, it moves into more urban and compact “smart cities.”

Main problem: How to keep making money in JapanBut despite all these grand vision and ideas, at the moment the biggest obstacle for all of the Japanese automakers is the strong value of the yen. Not only did the yen hit a post-war high in October, it’s 50 percent higher than what it was three years ago.

"Some people can say: You're making money and you're growing. Yes, we're making money and we're growing – outside Japan," said Ghosn, speaking about the current state of the Japanese currency. "But today our main problem is we cannot justify continuing to invest in Japan and projects in Japan. And that's exactly where the problem is.”